| Accounting principles are the basic assumptions, | | | | that might overstate or understate figures; and, |
| rules of operation, and essential characteristics | | | | what information should be disclosed so that the |
| that make up the framework for the construction | | | | reader will fully understand the circumstances |
| of accounting financial statements. | | | | under which the information is being presented. |
| Long ago, I was perplexed to discover that there | | | | There are also basic assumptions that the reader |
| was no "set" of accounting principles that was | | | | can count on, such as: the information is related |
| presented in one form such as you might find in | | | | to the business entity only and doesn't have any |
| the Bill of Rights. This is not to say that the | | | | unrelated information mixed in; the business is a |
| principles are incomplete or vague, it only means | | | | going concern and won't cease operations soon; |
| that the definitions of accounting principles can be | | | | the financial information presented is measured in |
| presented in various formats, which may lead to | | | | specific time intervals such as a month, quarter or |
| confusion for some people, especially beginners. | | | | year; the financial information is using a certain |
| Be that as it may, accounting principles are | | | | unit of measure such as dollars, not board feet, |
| absolutely necessary when preparing financial | | | | etc.; the information is presented at historical cost, |
| statements, just as the rules of a particular card | | | | i.e., when received, paid, or incurred; and, the |
| game make the card game possible in the first | | | | method of accounting being used is double-entry |
| place. Accounting principles are like the glue that | | | | and not some other method. |
| holds the accounting process together. For | | | | These are accounting principles as opposed to |
| example, financial statements have an overall | | | | accounting standards. An accounting standard is an |
| objective, which is to provide the user of the | | | | agreement as to how an accounting issue will be |
| statements a useful tool for making business | | | | treated. For instance, a standard might state what |
| decisions. | | | | type of inventory system is appropriate to use |
| In order to be useful, the accounting information | | | | for a certain type of business; how capital leases |
| must have certain characteristics, such as being | | | | should be recorded; how many years intangible |
| dependable and practical. To be dependable, the | | | | assets should be amortized; what methods of |
| accounting information must be unbiased, | | | | depreciation should be used, and so on. There are |
| accurate, and verifiable. To be practical, accounting | | | | literally thousands of accounting standards that |
| information must be predictable, prepared in a | | | | have been issued over the years. These |
| timely fashion, and be able to provide meaningful | | | | standards are constantly being revised or |
| feedback. Additional characteristics are that the | | | | discarded as they become outdated. |
| accounting information must be consistent, | | | | If you want to play the accounting "game of |
| comparable, serve a utilitarian need (such as cost | | | | cards", you must become familiar with the "rules |
| benefit), and make a material difference. | | | | of the game", which are accounting principles and |
| Besides characteristics, certain operational rules | | | | standards. If you choose to not play by the rules, |
| are established as to when revenue and expenses | | | | you do so at your own peril, as we have seen |
| are reported; how expenses are matched to | | | | recently in the U.S. corporate accounting scandals. |
| revenue; what to do when a choice can be made | | | | |